UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarter Ended Commission File No. 33-76064
September 30, 1997
GUARANTY FINANCIAL CORPORATION
Virginia 54-1786496
(State or other Jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1658 State Farm Blvd., Charlottesville, VA 22911
(Address of Principal Executive Office)
(804) 970-1100
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes _X_ No ___
As of October 29, 1997, 1,501,383 shares were outstanding.
GUARANTY FINANCIAL CORPORATION
QUARTERLY REPORT ON FORM 10-QSB
INDEX
Part I. Financial Information Page No.
Item 1 Financial Statements
Consolidated Balance Sheets as of
September 30, 1997 (unaudited) and December 31, 1996 3
Consolidated Statements of Operations for the Three and
Nine Months Ended September 30, 1997 and 1996 (unaudited) 4
Consolidated Statements of Cash Flows for the
Nine Months Ended September 30, 1997 and 1996 (unaudited) 5
Notes to Consolidated Financial Statements 7
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
Part II. Other Information
Item 1 Legal Proceedings 13
Item 2 Changes in Securities 13
Item 3 Defaults upon Senior Securities 13
Item 4 Submission of Matters to a Vote of Security Holders 13
Item 5 Other Information 13
Item 6 Exhibits and Reports on Form 8-K 13
Signatures 14
2
GUARANTY FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(In Thousands)
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------ ------------
ASSETS (Unaudited)
Cash and cash equivalents $8,415 $6,076
Investment securities
Held-to-maturity 2,948 3,157
Available for sale 12,641 0
Trading - 16,736
Investment in FHLB stock, at cost 875 1,360
Investment in FRB stock, at cost 72 -
Loans receivable, net 96,448 81,270
Accrued interest receivable 914 671
Real estate owned 65 51
Office properties and equipment, net 5,956 4,946
Other assets 1,397 1,753
--------- --------
Total assets $129,731 $116,020
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits:
NOW/MMDA accounts $13,261 $10,300
Savings accounts 5,907 4,777
Certificates of deposit 88,954 66,324
--------- --------
108,122 81,401
Bonds payable 2,464 2,706
Advances from Federal Home Loan Bank 5,500 17,500
Securities sold under agreement to repurchase - 6,681
Accrued interest payable 65 61
Payments by borrowers for taxes and insurance 278 106
Other liabilities 1,775 990
--------- --------
Total liabilities 118,204 109,445
--------- --------
STOCKHOLDERS' EQUITY
Preferred stock, par value $1 per share, 500,000
shares authorized, none issued - -
Common stock, par value $1.25 per share,
4,000,000 shares authorized, 1,501,383 and
924,008 issued and outstanding 1,877 1,155
Additional paid-in capital 5,725 1,975
Net unrealized gain (loss) on securities
available for sale 19 -
Retained earnings 3,906 3,445
--------- --------
Total stockholders' equity 11,527 6,575
--------- --------
Total liabilities and stockholders' equity $129,731 $116,020
========= ========
3
GUARANTY FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ ------------------
1997 1996 1997 1996
-------- -------- -------- --------
(unaudited) (unaudited)
Interest income
Loans $ 1,950 $ 1,740 $ 5,472 $ 5,042
Mortgage-backed securities 133 283 927 673
Other securities 368 136 611 407
Trading account assets -- -- -- 2
------- ------- ------- -------
Total interest income 2,451 2,159 7,010 6,124
------- ------- ------- -------
Interest expense
Deposits 1,320 968 3,541 2,688
Borrowings 260 475 984 1,403
------- ------- ------- -------
Total interest expense 1,580 1,443 4,525 4,091
------- ------- ------- -------
Net interest income 871 716 2,485 2,033
Provision for loan losses 30 46 76 92
------- ------- ------- -------
Net interest income after provision
for loan losses 841 670 2,409 1,941
Other income
Loan fees and servicing income 92 149 319 406
Gain (loss) on sale of loans and securities 395 68 471 159
Gain on sale of purchased servicing -- -- 117 --
Service fees on checking 39 25 160 69
Other 53 32 138 83
------- ------- ------- -------
Total other income 579 274 1,205 717
------- ------- ------- -------
Other expenses
Personnel 424 294 1,219 818
Occupancy 212 58 555 207
Data processing 108 76 275 223
Deposit insurance premiums 30 54 86 143
BIF/SAIF premium disparity assessment -- 347 -- 347
Other 239 166 559 438
------- ------- ------- -------
Total other expenses 1,013 995 2,694 2,176
------- ------- ------- -------
Income (loss) before income taxes 407 (51) 920 482
------- ------- ------- -------
Provision (loss) for income taxes 141 (18) 324 168
------- ------- ------- -------
Net income (loss) $ 266 $ (33) $ 596 $ 314
======= ======= ======= =======
Earnings (loss) per common share $ 0.18 $ (0.04) $ 0.41 $ 0.34
------- ------- ------- -------
4
GUARANTY FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended September 30,
(In Thousands)
1997 1996
-------- --------
(unaudited)
Operating Activities
Net Income $ 596 $ 314
Adjustments to reconcile net income to net cash provided
(absorbed) by operating activities:
Provision for loan losses 76 92
Depreciation and amortization 248 85
Gain on sale of purchased servicing (117) --
Proceeds from the sale of purchased servicing, net 374 --
Amortization of deferred loan fees 69 99
Net amortization of premiums and accretion of discounts 87 95
Loss (gain) on sale of loans (182) (255)
Originations of loans held for sale (8,085) (6,790)
Proceeds from sale of loans 8,267 6,914
Loss (gain) on sale of securities available for sale (310) (23)
(Gain) loss on trading securities 9 118
Purchase of trading securities (42,259) (72,381)
Sales of trading securities 42,250 72,263
(Gain) loss on sale of real estate owned 2 1
Other, net 764 (97)
Changes in:
Accrued interest receivable (243) (92)
Other assets 342 153
Accrued interest payable 4 (9)
Prepayments by borrowers for taxes and insurance 172 223
Other liabilities 785 239
-------- --------
Net cash provided (absorbed) by operating activities 2,849 949
-------- --------
Investing activities
Net (increase) decrease in loans (15,185) (9,276)
Mortgage-backed securities principal repayments 1,039 740
Proceeds from sale of securities available for sale 37,165 10,620
Purchase of securities available for sale (34,921) (17,990)
Redemption of FHLB stock 485 43
Purchase of FRB stock (72) --
Purchases of office properties and equipment (1,258) (2,497)
-------- --------
Net cash provided (absorbed) by investing activities (12,747) (18,360)
-------- --------
5
GUARANTY FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS, continued
1997 1996
-------- --------
(unaudited)
Financing activities
Net increase (decrease) in deposits 26,721 19,289
Proceeds from FHLB advances 3,500 5,000
Repayment of FHLB advances (15,500) (8,550)
Increase (decrease) in securities sold under agreement to repurchase (6,681) 2,920
Proceeds from the issuance of common stock, net 4,472 --
Principal payments on bonds payable, including unapplied payments (275) (604)
-------- --------
Net cash provided (absorbed) by financing activities 12,237 18,055
-------- --------
Increase (decrease) in cash and cash equivalents 2,339 644
-------- --------
Cash and cash equivalents, beginning of period 6,076 5,836
-------- --------
Cash and cash equivalents, end of period $ 8,415 $ 6,480
======== ========
Supplemental Disclosure of Non-cash Investing Activities:
On January 1, 1997, securities with a carrying value of approximately $15.8
million were transferred from the trading account to the available for sale
account.
6
GUARANTY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Nine Months ended September 30, 1997 and 1996
Note 1 Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
Guaranty Financial Corporation ("the Corporation") and its wholly-owned
subsidiaries, Guaranty Bank ("the Bank"), GMSC, Inc., which was organized as a
financing subsidiary, and Guaranty Investments Corp., which was organized to
sell insurance annuities and other non-traditional products. All material
intercompany accounts and transactions have been eliminated in consolidation.
Note 2 Basis of Presentation
In the opinion of management, the accompanying unaudited interim consolidated
financial statements contain all adjustments (consisting only of normal
recurring accruals) necessary to present fairly the financial position as of
September 30, 1997 and 1996 and the results of operations and cash flows for the
interim periods ending September 30, 1997 and 1996. All 1997 interim amounts are
subject to year-end audit, and the results of operations for the interim periods
is not necessarily indicative of the results of operations to be expected for
the year.
7
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Charter Conversion
Effective the close of business on June 30, 1997, Guaranty Bank, the primary
operating subsidiary of the Corporation, received final regulatory approval to
convert from a federally-chartered savings association to a Virginia-chartered,
federal reserve member commercial bank. Management believes that operating under
a commercial bank charter will better suit the Bank's business plan than will
the federal savings association charter.
New Branch Site
On October 21, 1997, Guaranty Bank received approval from the Bureau of
Financial Institutions for the State of Virginia to establish a branch at the
Lake Monticello Plaza in Fluvanna County, Virginia.
Changes in Financial Condition
Deposit growth during the nine months ended September 30, 1997 and the
completion of a secondary offering of common stock in January 1997 enabled
Guaranty to increase assets. Total assets increased by $13.7 million, or 11.8%,
from $116.0 million at December 31, 1996 to $129.7 million at September 30,
1997. This deposit growth - all local funds - was used to reduce borrowings with
the remaining amounts primarily invested in loans and cash at September 30,
1997.
Cash and cash equivalents increased $2.3 million, or 37.7%, to $8.4 million at
September 30, 1997 from $6.1 million at December 31, 1996. This increase in cash
was due to the combination of increased deposits, principal payments received on
investment securities and loans, the sale of loans and the completion of a
secondary offering of the Corporation's common stock in January 1997. Proceeds
to the Corporation from the offering (net of offering expenses of approximately
$280,000) were approximately $4.4 million.
Investment securities, at September 30, 1997, decreased $4.4 million, or 22.1%,
to $15.5 million from $19.9 million at December 31, 1996. This decrease was
primarily a result of principal repayments on mortgage-backed securities and the
sale of securities to fund loan closings and the general operational needs of
the Corporation. In addition, to reduce the Corporation's exposure to prepayment
risk on mortgage-backed securities, the Corporation restructured its available
for sale portfolio into corporate bonds from mortgage-backed securities during
the quarter ended September 30, 1997.
Due to a mandatory stock redemption in March 1997, investment in Federal Home
Loan Bank stock, a restricted security recorded at cost, decreased $485
thousand, or 35.6%, from $1.4 million at December 31, 1996 to $875 thousand at
September 30, 1997.
The loan portfolio consists primarily of mortgage loans, the majority of which
are residential first mortgage loans. Of the $97.5 million of gross loans
outstanding at September 30, 1997, approximately 69.1% represent residential
first mortgages. Net loans were $96.4 million at September 30, 1997, an increase
of $15.1 million, or 18.6%, from net loans of $81.3 million at December 31,
1996. This increase was primarily a result of increased loan originations due to
the general growth and expansion of the existing branch network during the past
nine months, market demand and the expanded commercial and consumer lending
programs which were
8
started in 1996. Increased originations were partially offset by scheduled loan
payments and the sale of approximately $8.1 million of fixed rate mortgage loans
at a gain of $182 thousand.
Real estate owned of $51 thousand at December 31, 1996 was sold during the first
quarter of 1997 at a loss of approximately $1 thousand. Other real estate owned
at September 30, 1997 of approximately $65 thousand consisted of one single
family residence acquired through foreclosure.
Deposits increased by $26.7 million, or 32.8%, between December 31, 1996 and
September 30, 1997. The majority of the growth was in certificates of deposit,
which increased $22.6 million, or 34.1%. This growth, comprised solely of local
funds, is a reflection of continued marketing and the opening of a new branch on
the east side of Charlottesville in December 1996 and in Harrisonburg Virginia
in May 1997. Management has recently instituted expanded programs to attract
commercial checking accounts and other retail demand deposit accounts to reduce
the Corporation's reliance on time deposits, which were used as a primary
funding source when the bank operated as a savings and loan. However, there is
no assurance that these programs will be successful or if successful, will
reduce the Corporation's reliance on time deposits as a source of funds.
Office properties and equipment increased $1.1 million, or 22.4%, since December
31, 1996. This increase was primarily due to the completion of the fifth retail
branch office, which is located in Harrisonburg, Virginia, and improvements to
the previously leased RIO Road branch and office building which was purchased in
June 1996. All available space within the RIO Road building was leased at June
30, 1997. The Harrisonburg branch opened to the public in May 1997.
Due to increased liquidity resulting from increased deposits and the completion
of a secondary offering of common stock, management reduced the reliance on
other borrowed funds during the nine months ended September 30, 1997. Advances
from Federal Home Loan Bank decreased $12.0 million, or 68.6%, due to scheduled
maturities and early prepayment of FHLB advances which resulted in one time
prepayment penalties of approximately $45 thousand which are included in other
expenses in the consolidated financial statements. No securities sold under
agreements to repurchase were outstanding at September 30, 1997, compared to
$6.6 million at December 31, 1996.
Results of Operations
Net Income
Guaranty reported net income of $266 thousand, or $.18 per share, for the
quarter ended September 30, 1997 compared to a loss of $33 thousand, or $.04 per
share, for the same period in 1996. This increase was primarily a result of
improved net interest margin and increased gains on the sale of loans and
securities resulting from a favorable interest rate environment during the first
nine months of 1997. In addition, Guaranty incurred a one-time special
assessment of approximately $347 thousand to recapitalize the SAIF during the
third quarter of 1996. Net income was $596 thousand, or $.41 per share, for the
nine months ended September 30, 1997, up 90% from the $314 thousand, or $.34 per
share, earned during the same period in 1996. This increase was primarily a
result of increased net interest income and gains on the sale of loans and
securities which were partially offset by additional costs relating to the
opening of the Harrisonburg branch in May 1997 and one-time costs associated
with the conversion from a federally chartered savings and loan to a state
chartered bank effective the close of business on June 30, 1997.
9
Net Interest Income
Net interest income increased by $155 thousand, or 21.6%, to $871 thousand for
the three months ended September 30, 1997, compared to $716 thousand for the
same period in 1996. Net interest income increased by $452 thousand, or 22.2%,
to $2.49 million for the nine months ended September 30, 1997 compared to $2.03
million in the same period in 1996. Average earning assets increased by $15.3
million to $117.1 million for the nine months ended September 30, 1997, compared
to an increase of $13.6 million to $99.1 million for the same period in 1996.
The average rate earned decreased to 7.99% for the nine months ended September
30, 1997 from 8.71% during the same period in 1996. Average interest bearing
liabilities increased by $13.9 million to $114.1 million for the nine months
ended September 30, 1997 compared to an increase of $10.2 million to $95.7
million for the same period in 1996. The average cost of interest bearing
liabilities decreased to 5.29% for the nine months ended September 30, 1997 from
6.03% during the same period in 1996. Interest rate spread and net interest
margin for the nine month periods ending September 30, 1997 and 1996 were 2.70%
and 2.83%, and 2.69% and 2.89%, respectively. The increase in average earning
assets was primarily attributed to loan growth while the increase in average
interest bearing deposits was primarily attributed to growth in time deposits.
Management expects the net interest margin to improve over the next twelve to
twenty four months as the expanded commercial and consumer lending programs,
which were begun in 1996, begin to impact the balance sheet and statement of
operations. In addition, all newly originated fixed-rate mortgage loans are sold
in the secondary market. Also, management has recently implemented expanded
programs to attract commercial checking account and other retail demand deposit
accounts to reduce the Corporation's reliance on non core time deposits, which
were used as a primary funding source when the bank operated as a savings and
loan. However, there is no assurance that these programs will be successful or
if successful, will reduce the Corporation's reliance on time deposits as of
source of funds.
Provision for Loan Losses
Management analyzes the potential risk of loss on Guaranty's loan portfolio,
given the loan balances and the value of the underlying collateral. The
allowance for loan losses is reviewed monthly and is based on the loan
classification system, which classifies problem loans as substandard, doubtful,
or loss. Additional provisions are added when deemed necessary by management.
Based on this evaluation, Guaranty recorded a provision of $30 thousand for the
three months ended September 30, 1997, compared to a provision of $46 thousand
for the same period in 1996. For the nine month periods ended September 30, 1997
and 1996, Guaranty recorded a provision of $76 thousand and $92 thousand,
respectively. As of September 30, 1997, the total allowance for loan losses
amounted to $902 thousand, or .9% of gross loans outstanding.
Non-Interest Income
Non-interest income increased $305 thousand, or 111.3%, to $579 thousand for the
three months ended September 30, 1997 from $274 thousand for the same period in
1996. Non-interest income increased by $488 thousand, or 68.1%, to $1.2 million
for the nine month period ended September 30, 1997 from $717 for the same period
in 1996. The primary reason for the increase in both periods was increased gains
on the sale of loans and securities as a result of a favorable interest rate
environment during the third quarter of 1997. Gains on the sale of loans and
securities increased $312 thousand, or 196.2%, to $471 thousand for the nine
month period ended September 30, 1997 from $159 thousand for the same period in
1996. In addition, during June 1997, the Corporation recorded a gain of $117 on
the sale of purchased servicing relating to loans secured by property which was
outside of the Bank's principal market area.
10
Non-Interest Expense
Non-interest expense increased $18 thousand, or 1.8%, to $1.01 million for the
nine months ended September 30, 1997 compared to $995 thousand for the same
period in 1996. Non-interest expense increased $518 thousand, or 23.8%, to $2.7
million for the nine months ended September 30, 1997 compared to $2.2 million
for the same period in 1996. Excluding the one time charge to recapitalize the
SAIF during 1996, increases in both periods were primarily due to increased
costs directly related to the opening of a combined branch and corporate
headquarters on the east side in Charlottesville in December 1996, the opening
of the Harrisonburg branch in May 1997, and one time costs associated with the
successful conversion to a state bank effective June 30, 1997.
Income Tax Expense
Guaranty recognized income tax expense of $141 thousand for the three months
ended September 30, 1997, compared to an income tax benefit of $51 thousand for
the same period in 1996. Guaranty recognized income tax expense of $324 thousand
for the nine months ended September 30, 1997, compared to $168 thousand for the
same period in 1996. Changes in tax expense between periods is primarily a
result of changes in the level of taxable income.
Liquidity and Capital Resources
Liquidity is the ability to meet present and future financial obligations either
through the sale of existing assets or through the acquisition of additional
funds through asset and liability management. Guaranty's primary sources of
funds are deposits, borrowings and amortization, prepayments and maturities of
outstanding loans and securities. While scheduled payments from the amortization
of loans and securities are relatively predictable sources of funds, deposit
flows and loan prepayments are greatly influenced by general interest rates,
economic conditions and competition. Excess funds are invested in overnight
deposits to fund cash requirements experienced in the normal course of business.
Guaranty has been able to generate sufficient cash through its deposits as well
as through its borrowings. In connection with the conversion to a state
chartered bank, Guaranty anticipates reducing its reliance on borrowings and
time deposits as a source of funds.
In January 1997, the Corporation completed a secondary offering of its common
stock. Net proceeds to the Corporation from the offering were approximately $4.4
million.
On September 25, 1997, Guaranty declared a quarterly dividend of $.03 per share
payable on November 1, 1997 to holders of record as of October 15, 1997.
Guaranty uses its sources of funds primarily to meet its on-going operating
expenses, to pay deposit withdrawals and to fund loan commitments. At September
30, 1997, the total approved loan commitments outstanding amounted to $14.7
million. At the same date, commitments under unused lines of credit amounted to
$8.2 million. Certificates of deposit scheduled to mature in one year or less at
September 30, 1997 totaled $76.3 million. Management believes that a significant
portion of maturing deposits will remain with Guaranty.
11
At September 30, 1997, Guaranty exceeded all regulatory capital requirements as
shown in the following table.
Regulatory Requirement
----------------------------
Well Adequately
(Dollars in thousands) Actual Capitalized Capitalized
----------------------------------------
Tier 1 Risk Based Capital 13.56% 6.00% 4.00%
Total Risk Based Capital 14.62% 10.00% 8.00%
Tier 1 Leverage Ratio: 9.38% 5.00% 4.00%
12
Part II Other Information
Item 1 Legal Proceedings
Not Applicable
Item 2 Changes in Securities
Not Applicable
Item 3 Defaults Upon Senior Securities
Not Applicable
Item 4 Submission of Matters to a Vote of Security Holders
Not Applicable
Item 5 Other Information
Not Applicable
Item 6 Exhibits and Reports on 8-K
(a) Exhibits - None
(b) Reports - None
13
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange
Act of 1934, the registrant has caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
GUARANTY FINANCIAL CORPORATION
Date: November 10, 1997 By: /s/ Thomas P. Baker
----------------------------
Thomas P. Baker
President and Chief Executive Officer
Date: November 10, 1997 By: /s/ Vincent B. McNelley
----------------------------
Vincent B. McNelley
Senior Vice President and
Chief Financial Officer
14